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IRS readies nearly 4 million refunds for unemployment compensation overpayments

Tax Law and News IRS and tax professionals

The IRS will issue another round of refunds the week of July 12, 2021, to nearly 4 million taxpayers who overpaid their taxes on unemployment compensation received last year.

The American Rescue Plan Act (ARPA) of 2021, which became law in March 2021, excluded up to $10,200 in 2020 unemployment compensation from taxable income calculations. The exclusion applied to individuals and married couples whose modified adjusted gross income was less than $150,000.

Refunds by direct deposit will begin July 14 and refunds by paper check will begin July 16. The IRS previously issued refunds related to unemployment compensation exclusion in May and June, and will continue to issue refunds throughout the summer.

To ease the burden on taxpayers, the IRS has been reviewing the Forms 1040 and 1040SR that were filed prior to the law’s enactment to identify those people who are due an adjustment. For taxpayers who overpaid, the IRS will either refund the overpayment, or apply it to other outstanding taxes or other federal or state debts owed. The refund average is $1,265, which means some will receive more and some will receive less.

Most taxpayers need not take any action and there is no need to call the IRS. However, if, as a result of the excluded unemployment compensation, taxpayers are now eligible for deductions or credits not claimed on the original return, they should file a Form 1040-X, Amended U.S. Individual Income Tax Return.

Taxpayers should file an amended return if any of the following apply:

  • They did not submit a Schedule 8812, Additional Child Tax Credit, with the original return to claim the Additional Child Tax Credit, and are now eligible for the credit after the unemployment compensation exclusion.
  • They did not submit a Schedule EIC, Earned Income Credit, with the original return to claim the Earned Income Tax Credit (with qualifying dependents), and are now eligible for the credit after the unemployment compensation exclusion.
  • They are now eligible for any other credits and/or deductions not mentioned below. Make sure to include any required forms or schedules.

Taxpayers do not need to file an amended return if any of the following apply:

  • They already filed a tax return and did not claim the unemployment exclusion. The IRS will determine the correct taxable amount of unemployment compensation and tax.
  • They have an adjustment, because of the exclusion, that will result in an increase in any non-refundable or refundable credits reported on the original return.
  • They did not claim the following credits on their tax return, but are now eligible when the unemployment exclusion is applied: Recovery Rebate Credit, Earned Income Credit with no qualifying dependents, or the Advance Premium Tax Credit. The IRS will calculate the credit and include it in any overpayment.
  • They filed a married filing joint return, live in a community property state, and entered a smaller exclusion amount than entitled on Schedule 1, line 8.

Taxpayers will generally receive letters from the IRS within 30 days of the adjustment, informing them of what kind of adjustment was made (such as a refund, payment of IRS debt payment, or payment offset for other authorized debts) and the amount of the adjustment.